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The Case for Counterfeiting

Mises Daily: Tuesday, December 11, 2001 by

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In the government's never-ending quest to end the recession for which it is responsible, we have heard many references to consumer spending being partly responsible for not making things worse.  However, it seems that consumers have been less than "patriotic," as stores report somewhat lackluster sales for the Christmas shopping season, which actually makes sense, given that individuals who have either lost their jobs or fear for their own future are not likely to go on spending sprees.

For the past several months, these pages have been demonstrating just how woeful mainstream economic theory has been at describing the causes--and cures--for the business cycle.  As we hear economists take sides with politicians arguing over what will best "stimulate" the present moribund economy, it becomes obvious that the situation is even worse than ever.  In fact, if we are to take the current pronouncements from economists from the most elite citadels of higher education in this country, the only logical conclusion we can draw from them is that the best way for this recession to end is for government to unleash the counterfeiters.

It is currently illegal for individuals privately to print or coin money, which is an exclusive privilege given to the state.  However, the government is bound by the current rules of monetary creation, which is limited to the Federal Reserve having the ability to create new bank reserves through its open market operations.  (The Fed also lends money through its discount window and sets the reserve requirements for banks, although the open market operations are by far the most powerful money creation tool.)

Even though Alan Greenspan and the Fed have been feverishly pushing down the Fed's key interest rate, the wave of business investment that would allow the money multiplier effect to take place during a boom has not occurred during this latest bust.  This is hardly surprising, given the economic uncertainty that businesses are currently facing.

All of this presents a real problem to those who claim that a new wave of consumer spending will end this recession.  Since new money enters the economy through the banking system, the only way we see cash infusions is through increased bank lending.  The present economic climate, however, is not conducive to banks lending, which poses a real problem for those who believe the only way to recovery is for consumers to spend as though helicopters were dropping vast sums of money across the country.

Since the government's rules for money creation are not working, it seems the only plan of action that today's Keynesian economists should accept is for government to make counterfeiting legal.  Lest anyone think this is silly, imagine the "stimulus" benefits that counterfeiting would produce.

Counterfeiters, whether they work in cramped basements or other workplaces, print money and then instantly spend it.  Invariably, people recognize that it is counterfeit, and then the U.S. Secret Service moves in to find who originally printed and distributed the stuff.

There are good reasons why creating counterfeit money is illegal.  As Ludwig von Mises pointed out, money is the only commodity that does not confer a social benefit when its supply increases.  For example, if someone were to give me a bagful of freshly printed $100 bills, my own purchasing power would increase by the amount of the money in the bag.  However, the infusion of new money would also lessen the marginal value of money already in circulation, the beginnings of a new round of inflation, albeit quite small.  Having been the first recipient of the new money, I do not feel the effects of the inflation, however.

As long as the counterfeiter is not detected, he enjoys the same outcome as the one I have described.  The money provides benefits to the counterfeiter, but only at the expense of other people, as a small portion of their wealth has been transferred away from them and given to the individual who printed the new money in the first place.

The law recognizes this point, which is why counterfeiting is illegal in the first place.  However, if one is to take the spend, spend, spend exhortations from the government seriously, as a gaggle of economists are telling us, then it would seem only logical that the only way to quickly inject new spending into the economy is either through private counterfeiting, or if the government does it on its own.

In other words, the government could do like governments of Bolivia, Chile (under the Marxist Salvador Allende), and Argentina, and pay its employees directly with cash from the printing press.  Moreover, the authorities could encourage all of us to print new bills in the color copiers, and then accept them in stores with no questions asked.

This kind of plan, I can say with assurance, would quickly inject new money into the economy, and that would mean a spending spree that would dwarf anything we have already seen.  In other words, it would provide a "stimulus" that any politician--along with economists like George Akerlof, Paul Krugman, and Joseph Stiglitz--would hail as an economic savior.

Of course, such a move also would quickly bring hyperinflation, just as similar actions by authorities did so in the aforementioned countries. However, since many economists--such as Paul Samuelson, recipient of the 1970 Nobel Prize in economics--either have downplayed inflation or claimed it confers social and overall economic benefits, perhaps they would be willing to sign onto this newly proposed "stimulus" plan.  Granted, this plan is a joke, but it is no less a joke than what much of the economics profession has been recommending for the past several months.


William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University.  Send him MAIL.  See his Mises.org Articles Archive.